Sunday, February 13, 2011

Connecticut Taxes Too High Says Business Leader

Aetna’s CEO, Mark Bertolini, gave a shout through the ear trumpet of heedless legislators at a Middlesex County Chamber of Commerce breakfast, according to a report in the Business section of a Hartford paper:

"We've done the analysis, and, quite frankly, Connecticut falls very, very low on the list as an environment to locate employees . . . in large part because of the tax structure, the cost of living, which is now approaching, all in, the cost of locating an employee in New York City.”

Aetna -- a company that insures people in 160 countries around the world and maintains offices in Indonesia, Beijing, Shanghai, Abu Dhabi -- is well positioned to move jobs around on the international chessboard.

The business reporter noted darkly in his story, “In short, the Hartford-based health insurer could add workers anywhere around the globe as it grows its health-technology business. Forty percent of Aetna employees today work from home full-time.”

Aetna was engaged in opening offices in Egypt shortly before the country shook off its authoritarian ruler. It has always been easy for the United States to show the door to friendly despots. The difficult trick is establishing solidarity with popular democratic uprisings in regimes such as Iran, where radical Islam has gotten a toehold. Egypt’s future now lies in the hands of fumbling U.S. Foggy Bottom employees and the Muslim Brotherhood. Part of the reaction against its now departed dictator was the result of large scale unemployment of a highly educated workforce. The Egyptian street was full of college graduates holding masters degrees who were underutilized, a fertile ground for Aetna, provided the Muslim Brotherhood can be kept at bay.

The Obama administration is working on it.

Mr. Bertolini is the second major business leader in Connecticut who warned the legislature to get its house in order. Another major employer, United Technologies, earlier closed a plant over the objections of then Attorney General Richard Blumenthal and moved jobs out of state, where labor costs and taxes were less punishing. United Technologies rejected a tax abatement deal that did not cut its future costs significantly, and more recently New London based Pfizer found it more cost effective to move some of its operations out of state.

In a meeting with Wall Street financiers last March, United Technologies Corp.'s chief financial officer, Gregory Hayes told the group, “Anyplace outside of Connecticut is low-cost.” Mr. Hayes’ remark echoed a previous statement made by President of Sikorsky Aircraft Jeff Pino: “Even if work has to stay in the U.S., there are opportunities to reduce cost by moving out of those high-cost locations.”

Of UTC’s 205,000 global employees, 26,000 work in Connecticut, the majority of them at Pratt & Whitney, Sikorsky and Hamilton Sundstrand. Employees at Pratt & Whitney have diminished over the past two decades from 15,000 to 3,700.

Connecticut is well on its way to becoming a business museum. And the out migration of jobs ought to send a strong signal to legislators that what has been called “targeted tax cuts” – in reality, attempts by legislators to shape the business mix in their states – has not worked. Tax credits elapse; and when they do, companies that used tax credits to build up their businesses pull up stakes and move jobs in the direction of the next low bidder. The flow of business, like the flow of water, will always seek the path of least resistance.

Oddly enough, legislators who offer tax credits to a preferred business – say, fuel cell or pharmaceutical companies -- acknowledge that high business taxes, as a general rule, are an impediment to both jobs and the revenue that flows into state treasuries when a new business plants roots in Connecticut. Were this not the case, it would be futile to offer tax credits to the targeted company. But since tax credits, most often given to allow new development, are self elapsing once the business has established itself in a state, they offer no inducement to a company to remain in the state after the temporary reduction in business costs has elapsed.

There is another perhaps worse problem associated with tax credits, as opposed to general reductions in business taxes. Suppose the product made by the favored industry does not sell in the market place. Suppose the market, or that portion of it not shaped by a command economy, decides that the product encouraged by legislatures offering tax credits is not desirable. What happens then to the “investment” made by legislators who have decided to place their bets on, say, fuel cell development companies? Tax credits, rather than business tax reduction and real deregulation, exacerbated uncertainly in the marketplace.

The insurance business in Connecticut, once known as the insurance capital of the world, was not fashioned by legislators who fancied they knew more about the creation and distribution of insurance and financial products than those people employed by Mr. Bertolini. The insurance business developed, over a long period of time, as a direct response to perceive market needs, and it was shaped by people who wanted to make money in a capital environment not overburdened with high labor costs, punishing taxes and excessive regulation.

Some Connecticut legislators, apparently interested in creating their own mini-insurance operation, may think Aetna belongs in a museum, along with fire arm production companies, aircraft manufacturers and tobacco companies. Mr. Bertolini, who thinks otherwise, is betting that SustiNet isn’t going to work – because taxpayers won’t be able to afford it in the long run. In the short run, he and others are reminding the legislature, some mistakes can be fatal.